Re/insurance to help governments reduce future disaster losses – IDF

The Insurance Development Forum, a group formed of insurance and reinsurance industry representatives, alongside the World Bank and United Nations, held its first meeting last week laying out priorities as it seeks to help governments reduce future disaster losses and narrow the protection gap.

The IDF will seek to better incorporate techniques from insurance and reinsurance into government disaster risk reduction and resilience frameworks, and to create more sustainable and resilient global insurance market to help the world better face the growing threats from natural disaster and climate risk.

The meeting followed recent remarks by UN Secretary General Bank Ki Moon, at a meeting with representatives of the re/insurance industry, in which he urged the market to do more to help counter the threat posed by climate catastrophes and emphasised the role of insurance and reinsurance in helping to meet the UN’s Sustainable Development Goals.

With more than 90% of natural disaster costs uninsured the role of the insurance, reinsurance and capital markets to help narrow the protection gap is clear, with disaster risk transfer and financing provided by responsive risk transfer financial instruments set to play a key role in helping increase the world’s resilience to both disaster and climate related threats.

The IDF is chaired by XL Catlin Executive Deputy Chairman, Stephen Catlin, who commented; “My grandchildren expect me to make responsible decisions that affect their future. Insurers’ risk management skills help us assess natural disaster risk and can be exported to allow governments at all levels to reduce future losses by designing in resilience into infrastructure projects; and in increasing the use of insurance as a pre-disaster economic resource to allow people to protect their families, property and assets.

“Risk identification, measurement, pooling and diversification are essential features of any successful insurance program and regulation must recognize their value and purpose. These skills can increase the utilization of insurance which will reduce the reliance on post-disaster aid and better target resources to the most important and needed humanitarian crises. Research has shown that a 1% increase in insurance penetration can reduce the disaster recovery burden on taxpayers by 22%.

“The IDF brings together the resources of the broader insurance industry reflected in the membership of the International Insurance Society, The Geneva Association, the International Cooperative and Mutual Insurance Federation and the Association of Bermuda Insurers and Reinsurers.”

World Bank Group Managing Director and CFO Joaquim Levy, co-chair of the IDF, added; “We have seen growing demand from our client countries for solutions to manage the costs from disasters effectively, and this is best done by specifically addressing the different layers of risk. However, the insurance market is close to non- existent in many countries. Consequently, the formation of the IDF is a pivotal moment, with all the actors in the insurance industry coming together and strengthening partnerships.”

UNDP Assistant Administrator Michael O’Neill (on behalf of IDF co-chair Helen Clark, Administrator UNDP), further explained; “It [had] been a long time coming and that the insurance industry and the international community need each other. For the good of our planet, and especially for those countries and communities vulnerable to disasters. We at UNDP [Michael O’Neill continued] believe that the IDF has the potential to put vulnerable economies and societies on a path to green, risk-informed, and sustainable future. And in the process, to change the way we, in development agencies, and our partners in the private sector do business together.”

By helping the world’s governments and industries to better plan for and protect themselves against natural disasters, climate change and weather extremes, the resilience of the world can be increased and insurance penetration rates raised.

It’s vital that these efforts mobilise risk capital, as well as knowledge on risk modelling, sharing, pooling and techniques to transfer risk and enhance resilience. Regions of the world with low-insurance penetration need available risk capital and both industries and governments need to be encouraged to protect their assets, people and supply chains.

Recovery can then be enhanced, through the combination of better understanding of risks helping to promote the need for resilience from them, while risk capital can enable recovery to be swifter and efforts to reduce the impacts of disasters, such as infrastructural projects, can be backed by risk financing to ensure projects are completed and not impacted during development.

The world’s risk capital largely sits in the capital markets and the IDF and its members have an opportunity to promote the use of efficient tools and capital for risk transfer, alongside traditional re/insurance tools in order to create holistic solutions that transfer risk and encourage resilience.

World Bank MD Levy continued; ” It can play an important role in people’s lives, whether it is with micro insurance for natural disaster risk, protection against pandemics or protection of assets. We, at the World Bank Group, are focused on eradicating extreme poverty and boosting shared prosperity. With only about 17% of people in low and middle income countries with financial savings and insurance, compared to 45% in high income countries, it is the most vulnerable in our society who will benefit most from being insured.”

At its meeting the IDF, which acts as a forum to coordinate and mobilise re/insurance resources and develop strategic relationships with governments, industry and institutions, established four work streams:

1. Understanding Risk: the IDF will support a better understanding of hazards and the exposure and vulnerability of people and assets to those hazards. By quantifying the risks and anticipating the potential impacts of hazards, governments, communities and individuals can make informed decisions on resilience, insurance, investment and wider policies and interventions.
2. Risk and Insurance Regulation, Legislation and Policy: the IDF will promote (i) supportive and inclusive insurance regulation to increase access to insurance by the most vulnerable and (ii) integration of quantitative and standardized climate and natural hazard risk disclosure into mainstream financial and accounting systems and the appropriate adoption of resilience policies to protect lives, livelihoods and assets.
3. Risk Sharing, Transfer and Response: the IDF will fully support the delivery of the G7 InsuResilience Climate Risk Insurance Target and facilitate availability of climate and natural hazard risk sharing facilities in most regions. The IDF will identify and address challenges to wider insurance coverage (including sovereign, micro-insurance and conventional insurance facilities) and encourage insurance development metrics within updated official statistics and post 2015 indicators.
4. Risk and Resilience: the IDF will help build the capacity of developing and emerging countries to manage and implement sustainable financing and resilient investment from insurance and related sectors. It will support the creation of a Global Adaptation and Resilience Fund to invest in resilience related technologies, innovation and facilities.

Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.